IFI governance

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IFI governance reform freezing over?

17 June 2010

An in-depth analysis of the latest round of World Bank reforms shows they delivered significantly less than proclaimed, while IMF governance reforms, slated to conclude in January 2011 (see article), are proceeding slowly and promising only minor changes.

Despite official claims that developing countries now hold almost half the votes at the World Bank, an April detailed analysis by UK NGO the Bretton Woods Project shows that high-income countries have in fact held on to over 60 per cent of voting power across the World Bank Group. Middle-income countries, including global powers such as India, China and Brazil, are stuck on around one third of the votes. Low-income countries languish at 6 per cent, averaged across the different arms of the World Bank, including just 11 per cent at IDA, the Bank’s low-income country lending arm. Furthermore, though the exact formula for future reforms, due in 2015, has not yet been agreed, current proposals emphasise economic weight as the overriding element for deciding voting shares, which would further marginalise low-income countries.

Meanwhile, at the IMF, last year’s annual meetings promised a “shift in quota share to dynamic emerging market and developing countries of at least 5 per cent from over-represented to under-represented countries.” However, a March executive board progress report highlights that countries with the most to lose are digging their heels in. Apparently it is not yet agreed “whether the targeted shift should be to dynamic emerging market and developing countries, [or] all under-represented countries”. At the moment, the latter interpretation would mean some rich countries such as Spain, Ireland and Luxembourg might benefit, as they are ‘under-represented’ compared to their quota entitlements.

The exact scale of change is still being negotiated, with developing countries pushing for a greater than 5 per cent shift. “We’re not satisfied with the pace of reforms,” Brazil’s foreign minister Celso Amorim told the press in April.

When quota reform was announced, a commitment was also made to protect the voting share of poorest countries. Though not yet agreed, the report indicates that most executive directors favour “setting aside part of any ad hoc increase for the poorest members” rather than the more radical option of increasing the amount of basic votes all members are entitled to, which could lead to an increase in the overall voting share of low-income countries.

Going back on commitments

A 2008 commitment (see Update 60) to re-examine the quota formula before further reform is now opposed by “many directors,” according to the board progress report. This is important because quota allocations largely determine voting shares. However, an April paper by Ralph Bryant of US think-tank the Brookings Institution highlights that the IMF’s stated intention to use “the current formula as the basis to work from” would mean a decline in quota shares for low-income countries and also for emerging market countries like India and Russia. Middle-income countries including Brazil and China are currently fighting to keep re-examination of the quota formula on the table.

More radical reforms to address the Fund’s democracy and legitimacy deficits, such as the balancing of the current ‘one dollar one vote’ voting system with a one country one vote addition in a so-called double majority system (see Update 55), appear to have been sidelined, despite being promised by managing director Dominique Strauss-Kahn before he took office (see Update 58). Similarly, proposals made to change the differing percentage of votes required to pass different types of changes to the IMF have also been pushed off the table. Critically changes to the Fund’s founding document – their Articles of Agreement – require an 85 per cent vote in favour, giving the US, the only single country with more than 15 per cent of the vote, a veto.

In addition to affecting voting shares, quota reform also promises to open up the issue of what size the Fund should be. At the spring meetings, the G24 group of developing countries pushed for a doubling of IMF quotas in total. As countries would have to pay for quota increases, this would mean extra cash for the Fund, greatly expanding its capacity to lend, and increasing the amount that each country could borrow. Importantly it would also reduce the power of richer countries that would normally be called upon to supply additional resources through the ‘New Arrangements to Borrow’ should the IMF’s coffers run low (seeUpdate 65).

Increases to the allocation of the IMF’s special drawing right (SDR, an international reserve asset, see Update 65) still continue to be pushed by some countries, and civil society groups. Argentina is the latest country to raise this issue, circulating a paper proposing a further $250 billion worth of SDRs be issued.

Reforms to the role and accountability of the executive board and the International Monetary and Financial Committee (IMFC, the Fund’s ministerial level oversight body) are still on the table for discussion, including the abolition of the permanent seats held by the five major shareholders in favour of an all-elected board.

Secretive management selection

Finally, the commitment made by both the G20 and at the last IMF annual meeting to “an open, merit-based and transparent process for the selection of IMF management,” appears to be under pressure. It was already damaged by the appointment last October of a new Japanese deputy managing director without such a process. Now, the executive board progress report praises the 2007 procedure for selecting the managing director, despite the fact that it saw no change in the practice of the Europeans installing their candidate, though it admits that there may be “room for improvement”. The one minor improvement the report mentions is allowing former IMF governors and board members to nominate candidates.

Meanwhile, the World Bank appointed a former Indonesian finance minister, Sri Mulyani Indrawati, as its new managing director, meaning two out of three Bank managing directors are now women from developing countries. However, though the Bank claims to have conducted an “international search process” during her appointment, there was none of the promised transparency for this process, with no application procedure published, indicating that the Bank too is falling down on its commitments (see Update 63).

An IMF decision on a revised process is promised “in the near future”. With media speculation mounting that current IMF managing director Dominique Strauss-Kahn is considering quitting to launch a campaign for the 2012 French Presidency, the acid test for Fund commitments to an “open, merit-based and transparent process” may arrive sooner rather than later.

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The Bretton Woods Project is a UK-based NGO that challenges the World Bank and IMF and promotes alternative approaches. We serve as an information provider, watchdog, networker and advocate. Our flagship publications are the Bretton Woods Observer, a quarterly critical review of developments at the World Bank and IMF, and the Bretton Woods Bulletin, an online update of news and action on the institutions.